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#Investments — 18.10.2018

Emerging Strategy: Our Latest Recommendations

Guillaume Duchesne

Em

Emerging markets: upgrade to positive

Emerging equities have performed poorly. They have lost 16% (in USD) since the beginning of the year. Tightening global liquidity has hurt emerging markets by exposing the most vulnerable countries such as Turkey and Argentina and leading to a more general repricing of EM risk driven by: 1/ USD strength 2/ Persistent risk of further trade tensions. 3/ The deceleration of growth in China and depreciation of its currency.

We neverthelessĀ  areĀ  confident. Some factors driving EM assets are positive: 1/ Global economy that keeps expanding above potential should allow emerging earnings to grow at a double-digit pace. 2/ Valuations are reasonable (versus the US, in particular), especially after the recent sell-off: the P/E ratio is at 10.9x below its 5-yr average (11.7x). 3/ Most of the leverage is in local currency. 4/ Most emerging countries have a stronger external position (with the exception of Argentina, Turkey and South Africa);

In other words, conditions are getting into place for emerging markets to outperform developed markets over the medium term. In the nearer term, trade war news and impacts will weigh on prices, creating good buying opportunities in our view.

While we do not foresee a lasting, systemic crisis within emerging markets, sufficiently serious domestic turbulence in any one large emerging country could send near-term shock waves across the emerging landscape.

Our preference goes to Asia, China in particular, and Central Europe. We started to be less negative on some underperformers. We thus upgraded Mexico to neutral last month. This month, we upgraded Turkey and Brazil to neutral.